What is a credit score?

A credit score is fundamentally a numerical expression that represents a borrower's creditworthiness, which is a crucial aspect in the banking and finance sectors. It is derived from an individual's credit history, which includes factors such as payment history, amounts owed, length of credit history, new credit, and types of credit in use. Lenders often utilize this score to assess the risk of lending money or extending credit to consumers; a higher score typically indicates lower risk, making it easier for borrowers to obtain loans or credit under favorable terms.

Understanding the significance of a credit score is vital, as it not only affects loan approvals but also impacts interest rates and insurance premiums, greatly influencing an individual’s financial opportunities. Thus, identifying a credit score as a measure of creditworthiness is fundamental to understanding how borrowing and lending dynamics operate in the banking industry.